Individual speculative behavior and overpricing in experimental asset markets

Abstract

A rich history of theoretical models in finance shows that speculation can lead to overpricing and price bubbles. We provide evidence that, indeed, individual speculative behavior fuels overpricing in (experimental) asset markets. In a first step, we elicit individual speculative behavior in a one-shot setting with a novel speculation elicitation task (SET). In a second step, we use this measure of speculative behavior to compose dynamic, continuous double auction markets in line with Smith et al. (Econometrica 56(5):1119(Econometrica 56(5): -1151(Econometrica 56(5): , 1988). We find significant higher overpricing in markets with traders who exhibited more speculative behavior in the individual SET. However, we find no such differences in overpricing when we test for alternative explanations, using a market environment introduced by Lei, Noussair, and Plott (Econometrica 69(4):831-859, 2001) where speculation is impossible. Taken together, our results corroborate the notion that speculation is an important factor in overpricing and bubble formation if market environments allow for the pursuit of capital gains.

Personal traits and trading in an experimental asset market

“…The decisions of the subjects lead to an average SET-score of 3.53, which is in line with the score of 3.42 from Janssen et al (2018), with 4 also being a modal choice. However, the distribution of the values is "flatter" in our case, with more subjects (relatively speaking) being categorized into the extreme values category.…”

“…The first task is a Speculation Elicitation Task (SET) used by Janssen et al (2018). This task is in the form of a game based on the bubble game by Moinas and Pouget (2013) and it is essentially "finding-a-greater-fool" task.…”

“…The results for this measure are unambiguous and suggest that higher cognitive skills are associated with lower market bubbles and, more importantly for our study, higher achieved profits in experimental asset markets Shestakova et al, 2019, Breaban and Noussair, 2015, Cueva and Rustichini, 2015, Noussair et al, 2014 The last personal trait associated with asset market outcomes is the willingness to speculate, which reflects one's eagerness to be involved in speculative behavior that might turn out to be profitable. This trait is measured by the Speculation Elicitation Task Score (SET) introduced by Janssen et al (2018). They show that the SET-score is a strong predictor for bubble creation and individual trading activity and that there is no statistically significant relationship between decisions in this task and the results of the Cognitive Reflection Test (CRT) or risk measures (using the approach of Holt and Laury, Thus, all five personal traits are found to have a certain impact, at least at the aggregate level, on outcomes in asset markets.…”

Underpricing of initial public offerings in experimental asset markets

“…Charness and Neugebauer (2019), Carle et al (2019), or Kocher et al (2018) but also in experimental economics, e.g. Janssen et al (2019). concerning the ex-ante uncertainty of the issuer's intrinsic value (Beatty and Ritter 1986).…”

Bubbles and Financial Professionals

“…By assigning subjects to markets based on specific characteristics (i.e. being a professional or a student) we follow earlier studies that study price efficiency and bubble formation by composing markets according to student characteristics such as prior market experience (Dufwenberg et al, 2005), gender (Eckel and Füllbrunn, 2015), cognitive sophistication (Bosch-Rosa et al, 2018), or speculative behavior (Janssen et al, 2018). The theory does not discriminate by who is participating.…”